To BTT, or not to BTT

SummaryWhile a banking transaction tax (BTT) replacing all current taxes is seductive, it will need extensive ground preparation—from curbing the black economy to extending universal banking coverage. It would be better to simplify the present system for now

There have been several press reports about the BJP senior leadership considering the introduction of a flat bank transactions tax (BTT), and simultaneously abolishing all other 32 direct and indirect taxes, while leaving the import taxes/custom duties in place. The time frame for implementing it is left unspecified. The proposal is apparently being looked at by Narendra Modi as part of his plan for rationalising and simplifying the tax structure, which is in itself eminently desirable. The demand for BTT was vociferously reiterated by Baba Ramdev at a Delhi function on January 5, and subsequently in interviews on television channels on January 6.

The principal motive behind the proposal prepared by a Pune-based research organisation, Arthakranti Pratishthan, is the urge to simplify the hugely complicated extant tax structure. The tax system has substantial inbuilt discretion and, hence, the possibility of corruption and harassment and outright persecution of the taxpayers is high. There is no doubt that the high-handedness and utter viciousness of the tax officials has generated a very strong public reaction against the system, especially among the small and medium entrepreneurs. Moreover, being declaratory in nature, the present tax system allows significant evasion and low compliance. The cost of administering it is also appreciably high. So, should BTT be seriously considered?

Admittedly, being a flat, single-point tax to be collected automatically by commercial banks from recipients of bank transactions, BTT is simple and has practically zero compliance cost. Its simplicity and the prospect of liberation from legions of corrupt officials is hugely seductive. BTT will generate the required tax revenue and has buoyancy. And if implemented with due care, in phases, as is being contemplated by the BJP, it is worth considering.

The proposal cites the case of 17 countries where the securities transaction tax, and not BTT, is in place—as an additional and not an exclusive tax. It was tried in Brazil between 1998 and 2004 but again as an additional tax. There is, at present, no other country that has a BTT in place. India is structurally a fiscally deficit economy with a huge population and high levels of income inequality and poverty. These features exaggerate the regressive impact of such a flat transactions tax. BTT will be seen as regressive—like any indirect or transactions tax; 2% of tax on a small income has greater impact on the welfare of the poorer people than 2% imposed on